European markets recover from worst levels
Despite continuing worries about the global economy, as well as disappointment that there were no new stimulus measures announced by G20 finance ministers following their meeting in Shanghai, shares held up pretty well on the last day of the month.
A rise in crude prices after comments from Saudi Arabia about wanting to limit volatilty helped support markets, as did news that China was acting to try and boost bank lending and reduce borrowing costs. So the final scores in Europe showed:
- The FTSE 100 finished 1.08 points or 0.02% higher at 6097.09, up 0.22% on the month
- Germany’s Dax dipped 0.19% to 9495.40
- France’s Cac closed up 0.9% at 4353.55
- Italy’s FTSE MIB added 0.8% to 17,623.07
- Spain’s Ibex ended up 1.34% at 8461.4
- In Greece, the Athens market rose 1.89% to 516.71
On Wall Street the Dow Jones Industrial Average is currently up 49 points or 0.3%.
On that note it’s time to close for the evening. Thanks for all your comments and we’ll be back tomorrow for, among other things, the February manufacturing PMIs and Barclays results.
As European markets close in mixed fashion, Tony Cross, market analyst at Trustnet Direct, said:
London’s FTSE-100 is finishing up the day’s session broadly flat – we’re still below where we started the year, but sentiment does appear to be on the up. There was disappointment that we didn’t see more clarity out of the G20 meeting at the weekend, so it’s arguably quite surprising that we haven’t seen additional downside pressures as a result. ...
Where March takes the market remains to be seen – the tide does appear to have turned with regard to London’s FTSE-100 now being well beyond bear market territory and critically oil prices appear to be nudging higher, too. That said, the support we’re seeing for gold does suggest that there’s still a lack of confidence when it comes to the medium term view.
An unexpected drop in US home sales adds to the weak data already seen. Reuters reports:
Contracts to buy previously owned U.S. homes fell to their lowest level in a year in January, likely weighed down by harsh weather and a shortage of properties for sale, a report showed on Monday.
The National Association of Realtors said its pending home sales index declined 2.5 percent to 106.0, the lowest level since January of last year. Economists polled by Reuters had forecast contracts rising 0.5 percent last month.
Pending home contracts become sales after a month or two, and January’s unexpected drop suggested home resales will likely weaken after rising only 0.4 percent last month. Contracts were up 1.4 percent from a year ago.
The rally in stock markets could continue despite today’s uncertain performance, says Chris Beauchamp at IG:
February is going out on a dull note, with markets around the globe ending the month in mixed form. Europe and the UK are broadly lower, with an absence of heavyweight economic and corporate news (after all, who wants to publish data on a leap day?) adding to the general lack of direction.
The real fireworks come later in the week, with China data galore and then US non-farms on Friday. As a result, some of the month’s gains are being booked with an eye to buffing up returns for February. However, while this rally has been in effect for two weeks now, it doesn’t really show much sign of stopping, especially since we are hitting a strong historical period for stocks. So long as everyone keeps looking for a reason for the next selloff, the default direction for the market is upwards.
The performance of crude oil remains the most important element in this market, and with both Brent and WTI holding up well today there is every reason to expect more upside. Too many traders have been caught out trying to short the market over the past week or so, with little sign so far that the bounce has run its course.
China will kick off the manufacturing PMI numbers for February tonight, and there could well be a big impact on market sentiment:
Last three #FTSE100 sell-offs coincide with disappointing China PMI Manuf data, which is out overnight. #Justsaying pic.twitter.com/QU3kyc9iZJ
— Mike van Dulken (@Accendo_Mike) February 29, 2016
More downbeat data from the US:
Dallas Fed Manufacturing Activity (Feb) -31.8 versus -30.0 expected, previous -34.6
— Sigma Squawk (@SigmaSquawk) February 29, 2016
The planned merger between the London Stock Exchange and Deutsche Börse poses competition issues, according to France’s economy minister Emmanuel Macron.
The deal would hit smaller exchanges such as Euronext Paris. Macron told reporters (quotes courtesy Reuters):
We will assess the consequences in strategic terms for Paris’ financial centre.
He also raised doubts about the impact of any British exit from Europe on the deal:
I think we should assess the possible consequences of a Brexit on such a merger.
Updated
The G20 was right to list a UK exit from the European Union as a potential risk to the global economy in its statement following last week’s meeting of finance ministers in Shanghai, says Capital Economics.
But the research group’s chief global economist Julian Jessop said:
However, the negative impacts of ‘Brexit’ are likely to be smaller than many fear, including the short-term costs to the UK itself. More speculatively, there may even be some positives for the world economy – notably the additional pressure for more growth-friendly policies in the remainder of the EU.
In our view... while Brexit would have global ramifications, these should not be overstated, nor need they all be negative. For a start, we doubt the disruption to the UK economy would be as large as many fear. In particular, the uncertainties about the UK’s relations with the rest of Europe could be reduced during the period of negotiations before exit actually takes place. And unlike some potential euro departures, the UK already has its own currency and would be opting to leave rather than being pushed out. The UK would surely also swiftly reassert its commitment to international organisations like NATO and to cooperation with other Western powers in areas of common geopolitical interests.
What’s more, even if the UK economy does initially struggle following Brexit, it only accounts for around 4% of world GDP. Indeed, some of the feared costs to the UK – such as the relocation of international companies to the Continent – would not have any net impact on the global economy...
[And] it is surely inconsistent to argue – as some do – that Brexit would both be a disaster for the UK and encourage other member states to quit the EU as well. It is even possible – though perhaps only wishful thinking at this stage – that Brexit would be the catalyst for much-needed structural reform in the remainder of the EU, as well as a shift away from austerity. In this (admittedly rosy) scenario, Brexit might yet prove to be a long-term positive both for the UK and for the world economy.
Meanwhile there are more signs of weakness in the US economy, with the Chicago purchasing managers index coming in lower than expected.
The index fell from 55.6 in January to 47.6 in February, compared to forecasts of a figure of 53. The PMIs for the US as a whole are due on Tuesday (along with the data for Europe and the UK among others).
Wall Street edges higher
US markets are marginally higher in early trading, helped by a rise in the oil price.
Brent crude is currently up 1.9% at $35.78 a barrel on hopes that oil producers could act to stem the slide in prices. That was helped by Saudi Arabia saying in a statement that it “seeks to achieve stability in the oil markets and will always remain in contact with all main producers in an attempt to limit volatility and it welcomes any co-operative action.”
Saudia Arabia and Russia agreed a proposal earlier this month to freeze output at January levels, but Iran is keen to increase production now sanctions against the country have been lifted and it has renewed access to export markets. Iran said on Monday it had increased exports sharply over the past month.
So despite continuing worries about the global economy, notably China, and no new stimulus measures agreed by G20 finance ministers over the weekend, US markets have made a vaguely positive start, with the Dow Jones Industrial Average currently up 18 points or 0.1%.
RBS directors buy shares
Directors at Royal Bank of Scotland must be hoping the shares have reached their bottom.
Chief executive Ross McEwan and finance director Ewen Stevenson have both spent nearly £450,000 or 223p a share on buying 200,000 shares, while chairman Howard Davis has snapped up 40,000 at 222p each.
So far their faith is not reaping much reward. RBS shares are currently down 0.6p at 226p.
With the eurozone falling back into deflation, the odds on the European Central Bank acting at its meeting next week are growing.
SG expects #ECB to cut depo rate by 20bps in Mar to -0.5% & to extend QE til Dec2017. Sees BS to grow to 39% of GDP pic.twitter.com/7MbghJ8hG9
— Holger Zschaepitz (@Schuldensuehner) February 29, 2016
Summary: Brexit worries and eurozone woes
Time for a quick recap.
Britain has been warned that the pound could slide to parity with the euro if the public votes to leave the EU. Analysts at UBS predicted that sterling would lose around 20% of its value after Brexit, but would strengthen if the Remain side win.
They warned that the pound has also been hurt by the EU referendum, pushing it down to 78p to the €1.
In our view, the largest part of the weakness in sterling since November can be attributed to increased concern over the possibility of exit from the EU. ...
We think that the result of the referendum will be one of the UK to remain in the EU, thus our forecast is that sterling will eventually strengthen back to 73p. However, we expect some further weakness of sterling between now and the vote on 23 June.
And if Britain chooses to Leave the EU, the pound would slide to parity against the euro, UBS reckons.
Here’s the key forecast:
In other news....
China has eased monetary policy, as Beijing tries to protect its economy from a hard landing. The People’s Bank of China cut the Reserve Requirement Ratio on its banks by 50 basis points (0.5 percentage points), to boost liquidity and credit availability. Economists say more will be needed, though, to cushion the economy.
The former governor of the Bank of England has claimed that the eurozone is doomed to failure. In a new book, Lord Mervyn King warned that the public will revolt against mass unemployment and perpetual austerity, if policymakers try to impose closer political union to tackle its problems.
He says:
Monetary union has created a conflict between a centralised elite on the one hand, and the forces of democracy at the national level on the other.
King also argued that Greece needs major debt relief, and a cheaper currency, to end its long economic woes. Campaigners have welcomed the move, arguing that Athens creditors must swallow reality
Investors are expecting more stimulus measures from the European Central Bank, after the euro ares slipped back into deflation. Prices fell by 0.2% annually this month, the first negative move since last September.
Updated
Back in the UK, Amazon has sent shivers through the supermarket sector through a new deal with Morrisons.
Under the tie-up, the web giant will sell hundreds of Morrison’s food products to its Amazon Prime customers. This is a fillip for Morrisons, helping the struggling group to sell more items across the UK. Its shares are up 4% so far today.
But it’s a blow to Ocado; shares in the online supermarket chain have slumped by 9% as the City sees Amazon eating its market share.
And Tesco is also being hit - its shares have lost 2.6% today.
John Ibbotson of the retail consultants, Retail Vision, says Amazon could be a serious threat to the major markets:
It’s now game on for the rest of the Big Four, who suddenly don’t look so big after all.
Tesco could soon be about to find out what it’s like to be David rather than Goliath.”The problem for the Big Four is that if you pay £79 a year for Amazon Prime, you get the delivery free. Amazon seems content to deliver at a loss indefinitely.
Gerard Lyons, chief economic advisor to London mayor (and Brexit campaigner) Boris Johnson, is tweeting about the Chinese RRR cut too.
He believes it should help the economy, but also warns it could intensify talk of a currency war (the yuan hit a three-week low when the news was announced)
1/ China's decision to cut reserve requirement ratio today by 0.5% was a good one & highlights the scope they have to ease monetary policy
— Gerard Lyons (@DrGerardLyons) February 29, 2016
2/ The Chinese authorities have indicated clearly - and they did so again before the G20 - that they have scope to ease monetary policy
— Gerard Lyons (@DrGerardLyons) February 29, 2016
3/ While other G20 countries will naturally welcome China's attempts to stimulate growth they will also closely watch currency implications
— Gerard Lyons (@DrGerardLyons) February 29, 2016
4/ China has had falling producer prices for some time, low inflation & capital outflows so reserve requirement cut will boost liquidity.
— Gerard Lyons (@DrGerardLyons) February 29, 2016
5/ China still has scope to cut reserve requirements further and also plenty of room to ease rates, even towards zero if it so wished,.
— Gerard Lyons (@DrGerardLyons) February 29, 2016
6/ Ahead of the imminent Chinese Communist Party meeting & in the wake of G20 the authorities will be keen to use policy to stimulate growth
— Gerard Lyons (@DrGerardLyons) February 29, 2016
7/ The authorities will also be keen to manage the challenge of easier policy without triggering too aggressive a weakening of the currency.
— Gerard Lyons (@DrGerardLyons) February 29, 2016
8/ And we shouldn't overlook the scope for active fiscal policy, again fits with the G20, & also fits with the needs of the domestic economy
— Gerard Lyons (@DrGerardLyons) February 29, 2016
Philip Uglow, chief economist at MNI Indicators, suggests China was right to cut the reserve requirements on its banks today, given its weakening economy.
He says:
“Given the continued slowdown in the Chinese economy, it was not too surprising to see the central bank step in once again and loosen policy. The reserve requirement still remains at a relatively high level and there is plenty of room for more easing if needed.
Our own survey data showed a significant weakening in February, with the MNI China Business Sentiment Indicator dipping below the all-important 50 mark. The Westpac MNI China Consumer Sentiment Indicator also turned lower in February, clouding the outlook for spending over the coming months.”
Britain’s smaller City banks and investment companies are being spared new European rules on bonuses, designed to avoid excessive risk-taking.
The UK’s financial regulators have just announced that the rules, which restrict bonuses to 100% of base salary, will only be imposed on big banks and financial firms who are “systemically important”.
In a statement, the Bank of England argues that a ‘blanket ban’ on bonuses would be counter-productive, by pushing up basic pay.
Since the introduction of the bonus cap, a number of firms have markedly increased fixed pay as a percentage of total pay, whilst total pay remained stable during the same period.
The PRA and FCA believe that the shift to fixed remuneration makes it more difficult for firms to adjust variable remuneration to reflect their financial health, and limits deferral arrangements that put remuneration at risk should financial or conduct risks subsequently come to light.
City AM has a good early take:
Smaller UK banks and investment firms will not have to abide by EU bonus cap rules – FCA and PRA
And Juliet Samuel of the Wall Street Journal tweets:
UK regulators have said they're going to refuse to impose EU bank bonus regulations on small firms... Could cause a row.
— Juliet Samuel (@CitySamuel) February 29, 2016
Funnily enough, EU authorities admit they never intended all these rules to apply to small firms. But they wrote the legislation wrong
— Juliet Samuel (@CitySamuel) February 29, 2016
Money is continuing to pour into Eurozone government debt this morning.
This is driving down the interest rate, or yield, on safe-haven bonds.
German 10-year bunds have hit a yield of just 0.12%, a 10-month low, meaning investors are accepting virtually no return on their money.
It’s another sign of pessimism in the markets, with investors primarily worried about keeping their money safe rather than growing it.
10-year Bund yields at a 10-month low, on track for their largest quarterly drop since 2011 https://t.co/iNng8SelY0 pic.twitter.com/wdGueYpjAv
— fastFT (@fastFT) February 29, 2016
Updated
Debt campaigners have welcomed Mervyn King’s warning that a “significant proportion” of Greece’s debts must be written off.
But Tim Jones, economist at the Jubilee Debt Campaign, also warns that the current proposals for debt relief fall short:
“Lord King’s comments are yet another acknowledgment that Greece needs substantial debt cancellation, both for its own recovery, and the wider European economy.
Yet even if implemented, the current discussions on debt relief for Greece would not reduce payments for at least 15 years, and would leave them 10 times higher than Germany was paying after it had substantial debt cancellation in 1953.”
Buffett: Not much happened in markets recently
It takes more than a global market rout to alarm Warren Buffett.
The billionaire US investor is sounding remarkably relaxed this morning, as he appears on CNBC.
Buffett has revealed that his Berkshire Hathaway fund has been buying shares in 2016, despite the heavy falls on some markets. According to the 85-year old, “not much” happened in the markets recently.
He’s also expecting the “positive effects of low oil prices” to help the world economy in the months ahead.
Buffett to CNBC on markets: "Not much" happened in the markets over recent period; stocks will go up over time. pic.twitter.com/hEkJZKuH3E
— CNBC Now (@CNBCnow) February 29, 2016
“Not much” is an interesting way of summing up the recent market moves.
So far this year, the Nasdaq has lost 7.8% of its value while the Dow Jones Industrial average is off 5%. Across the globe, the German DAX has lost 12% and Japan’s Nikkei has shed almost 16%.
But Buffett made his name, and his fortune, by buying and holding stocks, so he knows what he’s doing.....
China cuts RRR: What the analysts say
Today’s surprise cut in China’s Reserve Requirement Ratio will help stabilise the Chinese financial system, says Duncan Innes-Ker of the Economist Intelligence Unit.
But it isn’t enough on its own, he adds:
“The latest cut in the RRR shows the central bank straining to maintain loose monetary conditions in a difficult economic climate. The move will partly offset the effects of capital outflows from China and the provisioning requirements that are forcing banks to lock up more funds as non-performing loans climb.
However, the surge in loans in January highlighted concerns that bank lending may be spiralling out of control. Ultimately, China’s economy cannot grow on credit alone. It needs further reforms to unlock productivity growth.”
Nordea analyst Aurelija Augulyte reckons China has the capacity to do more, given it still holds over $3trn of foreign exchange reserves:
China RRR cuts. Room for more. pic.twitter.com/7ruLkf5hqE
— Aurelija Augulyte (@auaurelija) February 29, 2016
Today’s in deflation figures also show that the ECB’s existing stimulus programme hasn’t actually worked yet.
The ECB is buying €60bn of assets each month, widening its balance sheet, but having little obvious impact on the consumer prices index (CPI)
Slap in the face: #ECB's QE has failed as #Eurozone back in deflation again. https://t.co/EiiFgXUFbf pic.twitter.com/M4PsqB49d4
— Holger Zschaepitz (@Schuldensuehner) February 29, 2016
The eurozone’s lurch back into deflation means Mario Draghi is certain to announce new measures to stimulate the European economy in two week’s time.
So argues Teunis Brosens of ING, who writes:
The weakening of core inflation shows the real and present danger that cheap oil will cause low inflation to become ingrained in Eurozone price and wage dynamics. This is especially bad for debt-laden households, businesses and governments in Southern Europe, which will have little scope to “inflate away” their debt burden by increasing nominal wages.
Today’s weak core inflation gives doves the upper hand at next week’s ECB-meeting and therefore pretty much seals the deal on additional monetary easing.
The eurozone is back in deflation
In another alarming sign, the eurozone has slumped back into deflation for the first time in five months.
Prices across the single currency region fell by 0.2% in February, according to data just released by Eurostat.
That’s worse than expected, and is the first negative inflation reading since September.
Energy prices were the main factor, but price pressures in other areas of the economy were also weak.
Core inflation, which strips out volatile elements such as food and fuel, dropped to just 0.7% from 1% in January.
It raises the pressure on the European Central Bank to ease monetary policy again at its March meeting.
#Euro-area consumer prices fall most in year as #ECB mulls easing https://t.co/GtUepiFNCB via @aspeciale pic.twitter.com/TK96bbO9yq
— Zoe Schneeweiss (@ZSchneeweiss) February 29, 2016
Updated
Did the #PBOC of China agree to cut the #RRR at G20 ?
— Shaun Richards (@notayesmansecon) February 29, 2016
China cuts RRR to stimulate economy
The Chinese central bank says it cut the RRR rate, to guarantee “ample liquidity” in the financial sector, and to encourage “appropriate growth” in the credit market.
The 50bp cut lowers the Reserve Requirement Ratio to 17%, meaning banks need to hold fewer assets in reserve and can offer cheaper credit.
A lower RRR will give Chinese banks the leeway to lower borrowing costs, and to make more money available to domestic companies and borrowers.
Stocks erase some of declines after #China cuts reserve ratio for banks, adding stimulus pic.twitter.com/hlzqCipNWl
— Caroline Hyde (@CarolineHydeTV) February 29, 2016
Updated
Breaking news from China! The People’s Bank of China has just eased monetary policy, by cutting the RRR - or Reserve Rate Requirement.
*PBOC SAYS RRR CUT EFFECTIVE MARCH 1, cuts by 50bps
— World First (@World_First) February 29, 2016
Updated
UBS: Brexit would drive pound to parity with the euro
Swiss bank UBS has just piled into the Brexit debate, saying there is a 40% chance that Britain will vote to leave the EU in June.
In a new report, UBS predicts that sterling would be hit hard if Britain left the EU.
It estimates that the pound would hit parity with the euro, which would help UK exporters but make trips to the continent much pricier.
Currently, sterling is trading around €1.27, meaning one euro is worth roughly 78p.
UBS reckons it will weaken to around 84p by June, and could then either sharply recover, or weaken, depending on the result.
That’s an interesting call from UBS. Other analysts have predicted that the euro would also be hit by Brexit - as it would raise new fears over the future of the eurozone.
Here’s a flavour of UBS’s report:
A date for referendum is set and the pound is getting pounded
The United Kingdom reached an agreement with the European Union and the UK announced that the referendum vote will take place on 23 June 2016 (see “Brexit: An ever closer referendum”). We map out where the pound could go in the event of a “Brexit”, how much of a rebound is likely with a vote to “Remain”, and the potential for further currency weakness between now and June.
What happens to EUR/GBP if the UK votes to stay in the European Union?
We think that EUR/GBP should revert to the 0.73 level, near which it spent most of last year. In our view, the largest part of the weakness in sterling since November can be attributed to increased concern over the possibility of exit from the EU.
What happens to EUR/GBP if the UK votes to leave (“Brexit”)?
We estimate the exchange rate level that would accommodate a sharp correction in the UK’s current account deficit and find that EUR/GBP could go to parity.
What probabilities do we assign to each outcome?
We assign a 60% probability to the UK staying in the EU and up to 40% probability of a vote to leave, as we have argued previously based on published opinion polls.
Our baseline forecast is 0.73 for the end of 2016
We think that the result of the referendum will be one of the UK to remain in the EU, thus our forecast is that sterling will eventually strengthen back to 0.73. However, we expect some further weakness of sterling between now and the vote on 23 June.
But a vote to leave would push EUR/GBP to 1.00
The price action so far makes it clear that sterling would weaken in the event of an exit vote. We think that the market would re-price to parity – and to the extent that it could accommodate a shift in the current account by 2.7% of GDP.
Updated
UK mortgage approvals hit two-year high
Breaking: UK mortgage approvals have hit their highest level in two years.
A total of 74,600 new home loans were approved last month, implying that the British housing market remains pretty robust.
UK mortgage rates hit new record low at avg. 2.96% in Jan as mortgage approvals rise to 2 yr high @bankofengland.
— David Robinson (@DavidRobinson2K) February 29, 2016
#UK | JAN MORTGAGE APPROVALS: 74.6K V 74.0KE pic.twitter.com/ZC7UwNU8Lu
— Ioan Smith (@moved_average) February 29, 2016
Here’s a jaw-dropping fact -- China is planning to lay off almost two million workers from its coal and steel industry.
It’s part of Beijing’s attempts to cut capacity in the sector in response to slowing demand, and to rebalance the wider economy towards consumption.
Reuters has the details:
Yin Weimin, the minister for human resources and social security, told a news conference on Monday that 1.3 million workers in the coal sector could lose their jobs, plus 500,000 from the steel sector.
China’s coal and steel sectors employ about 12 million workers, according to data published by the National Bureau of Statistics.
“This involves the resettlement of a total of 1.8 million workers. This task will be very difficult, but we are still very confident,” Yin said....
Markets hit by G20 damp squib
European stock markets have opened lower, amid disappointment that the world’s top finance ministers didn’t announce any concrete measures at their meeting last week.
In London, the FTSE 100 has shed 38 points, or 0.6%, to 6057 points.
The French and German markets are down around 0.9%, following moderate losses in Asia overnight which clocked 1% off Japan’s Nikkei.
Tony Cross, market analyst at Trustnet Direct, sums up the mood:
Markets are kicking off the last trading day of February on a rather downbeat note with the weekend’s G20 meeting of finance ministers in Shanghai almost appearing to have muddied the waters, rather than provided any clarity.
Policymakers appear to be in agreement that they need to act in a coordinated manner, but given the reactions we’ve seen so far, that certainly doesn’t appear to be the case.
The G20 meeting ended with a communique which warned that the global recovery was “uneven” and failing to deliver “strong, sustainable and balanced growth”. But in terms of action, it only committed to “further enhancing the structural reform agenda”
They also warned against Britain leaving the European Union. But as the Guardian reported yesterday, that was added on the insistence of the UK government.....
Updated
Mervyn King also warns that Greece needs debt relief and a cheaper currency:
As he puts it:
It is evident, as it has been for a very long while, that the only way forward for Greece is to default on (or be forgiven) a substantial proportion of its debt burden and to devalue its currency so that exports and the substitution of domestic products for imports can compensate for the depressing effects of the fiscal contraction imposed to date.
Athens was promised some debt relief as part of its third bailout, agreed last summer.
But those talks are on ice right now, as negotiations with its lenders over implementation of the package continue to grind slowly onwards.
"It is evident that the only way forward for Greece is to default [...] and to devalue its currency." M'kayy Mervyn King.
— Frederik Ducrozet (@fwred) February 29, 2016
I liked it better when Mervyn King was boring.
— Frederik Ducrozet (@fwred) February 29, 2016
Updated
The Chinese stock market has closed at its lowest level in a month, as fears over the global economy dogged trading floors again.
At one stage, the Shanghai Composite was heading for a 15-month low, before finishing down 2.8%.
Ray Attrill of National Australia Bank blamed the lack of firm action at last weekend’s G20 meeting:
He told Bloomberg:
[Finance ministers delivered an]....admission of downside growth risks but no tangible commitments to fiscal policy action in particular to bolster growth in the short term”
China's stocks hit 15-month low after only vague G20 commitments on growth https://t.co/wbdfbSUjPG pic.twitter.com/LjEmJZX6bb
— Bloomberg Business (@business) February 29, 2016
As a devoted Aston Villa fan, Lord Mervyn King must have relegation on the brain right now.
In his new book, the BoE governor suggests that the eurozone missed a trick in 2012 by now allowing struggling eurozone members to be “temporarily” shunted down to a lower tier.
Then they could have won promotion again once they had established closer convergence with their stronger neighbours.
Germany’s Wolfgang Schäuble apparently proposed this to Greece last summer -- but the idea was rejected.
The big fear (as many football fans can attest), is that once you’re relegated, there’s no guarantee of getting back.
And ‘relegation’ could also encourage traders to force weaker members out of the euro. Duncan Weldon, head of research at Resolution Group, agrees:
EG: I simply don't understand the case for "temporary" Euro exit. Huge invite to speculative attack. Either it's irreversible or it isn't.
— Duncan Weldon (@DuncanWeldon) February 28, 2016
Ambrose Evans-Pritchard, the Telegraph’s international business editor, reckons King’s intervention is very significant.
This is huge. Nobody has more credibility than Mervyn King. If Otmar Issing joins him, walls will come crashing down https://t.co/CU3rRmehed
— A Evans-Pritchard (@AmbroseEP) February 28, 2016
Otmar Issing was Germany’s representative on the European Central Bank’s governing council, and thus an influential voice .
Lord King also suggests that Germany, rather than Greece, might pull the trigger on the eurozone.
Germany faces a terrible choice. Should it support the weaker brethren in the euro area at great and unending cost to its taxpayers, or should it call a halt to the project of monetary union across the whole of Europe?
The attempt to find a middle course is not working. One day, German voters may rebel against the losses imposed on them by the need to support their weaker brethren, and undoubtedly the easiest way to divide the euro area would be for Germany itself to exit.
Mervyn King's eurozone warning
Mervyn King, the former governor of the Bank of England, has fired a fierce broadside at the eurozone - claiming the single currency block may be doomed.
In a new book, the man who steered Britain’s central bank through (and into) the financial crisis warned that the tensions within eurozone - and the huge debts piled up by struggling members such as Greece - can never be fully resolved.
Crucially, King also argues that any moves to harden up the single currency could also backfire. Closer political union (which would make it easier to forgive Greece’s debts) will actually inflame popular anger against the eurozone project.
As he puts it:
“Monetary union has created a conflict between a centralised elite on the one hand, and the forces of democracy at the national level on the other. This is extraordinarily dangerous.”
Breaking up the 18-member strong union may be the only way to allow Europe’s struggling Southern states to regain competitiveness.
Here’s more from King, via the Daily Telegraph (who have the serialisation rights):
The more likely cause of a break- up of the euro area is that voters in the south will tire of the grinding and relentless burden of mass unemployment and the emigration of talented young people. The counter-argument – that exit from the euro area would lead to chaos, falls in living standards and continuing uncertainty about the survival of the currency union – has real weight.
If the members of the euro decide to hang together, the burden of servicing external debts may become too great to remain consistent with political stability.
But if the alternative is crushing austerity, continuing mass unemployment, and no end in sight to the burden of debt, then leaving the euro area may be the only way to plot a route back to economic growth and full employment. The long-term benefits outweigh the short-term costs. Outsiders cannot make that choice, but they can encourage Germany, and the rest of the euro area, to face up to it.
If the members of the euro decide to hang together, the burden of servicing external debts may become too great to remain consistent with political stability. As John Maynard Keynes wrote in 1922, “It is foolish… to suppose that any means exist by which one modern nation can exact from another an annual tribute continuing over many years.”
Here’s the full piece:
Daily Telegraph: Lord Mervyn King: ‘Forgive them their debts’ is not the answer
Updated
Introduction: Eurozone inflation may add to gloom
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It may be February 29th, but investors aren’t exactly leaping for joy this morning. Asian markets are falling, and European bourses are likely to follow suit.
Several issues dominate the trading floors right now, including:
- The state of the global economy, with China’s weaknesses threatening a wider slowdown.
- Angst over the US elections. Donald Trump’s success at the Republican caucuses is alarming many observers, while Wall Street fears that Bernie Sanders’ has put inequality firmly in the spotlight.
- The eurozone: The refugee crisis is piling new stress on the region, with inflation still worryingly weak
- The Brexit question, with polls suggesting the EU referendum on June 23 could be close.
- Worries about negative interest rates, and fears that central bankers are running out of ammo.
But despite these fears, finance ministers didn’t agree any new measures at their G20 meeting last weekend.
And for some investors, that’s a decent reason to keep out of the markets...or cut their holdings.
Down day ahead...disappointment on no coordinated action from #G20 pic.twitter.com/O1umxtseE7
— Caroline Hyde (@CarolineHydeTV) February 29, 2016
Coming up this morning...
There’s not much on the agenda, but we do get fresh eurozone inflation data at 10am GMT.
That is expected to show a further weakening in price pressures, with the consumer prices index tipped to drop to 0% from 0.3% in January.
And at 9.30, the latest UK consumer credit and mortgage lending figure are out.
Updated
